FB Financial Corporation — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017. FB Financial is a Tennessee bank holding company operating FirstBank, with banking operations in Tennessee, north Alabama and north Georgia, and a mortgage business. Amounts below are in U.S. dollars; financial statement amounts are presented in millions unless otherwise noted.
Key financial results
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Net interest income | $30.4 | $28.4 | $60.7 | $54.3 |
| Noninterest income | $35.7 | $38.4 | $66.7 | $69.4 |
| Noninterest expense | $49.1 | $50.6 | $95.6 | $91.9 |
| Income before income taxes | $17.8 | $16.9 | $33.0 | $32.5 |
| Net income | $11.2 | $15.8 | $21.0 | $30.4 |
| Diluted earnings per share | $0.43 | $0.92 | $0.82 | $1.77 |
| Net interest margin, tax-equivalent | 4.19% | 4.40% | 4.24% | 4.20% |
| GAAP efficiency ratio | 74.35% | 75.84% | 74.99% | 74.33% |
- Reported Q2 net income declined 29% year over year, while pretax income increased. The principal comparability factor is that FB Financial became a taxable C corporation in September 2016; Q2 2016 reported results did not include federal income tax. On a pro forma C-corporation basis, Q2 2016 net income was $10.6 million and diluted EPS was $0.62; corresponding six-month figures were $20.4 million and $1.19.
- Q2 2017 tax expense was $6.6 million; six-month expense was $12.0 million. Reported net income was modestly higher than the 2016 pro forma amount, but diluted EPS was lower, reflecting the larger share count after the 2017 private placement.
- Q2 mortgage banking income was $30.2 million, nearly flat year over year; six-month mortgage banking income was $55.3 million versus $54.6 million. Mortgage closings increased to $1.60 billion in Q2 and $2.94 billion for the first half, supported by correspondent-channel growth.
- Q2 noninterest income fell mainly because 2016 included $2.6 million of securities gains. First-half noninterest income also declined, primarily due to lower securities gains. First-half noninterest expense increased 3.9%, notably from salaries, data processing, advertising and growth-related costs.
Financial position, cash flow and capital
- At June 30, 2017, total assets were $3.35 billion, up 2.1% from year-end 2016. Loans held for investment were $1.97 billion, up $122.2 million; loans held for sale were $427.4 million, down $80.0 million.
- Deposits were $2.73 billion, up 2.1% from December 31, 2016. Noninterest-bearing deposits were $715.4 million, or 26.2% of deposits. The loan-to-deposit ratio was 72.26%.
- Cash and cash equivalents were $186.3 million. For the six months, operating cash flow was $67.4 million, investing cash outflow was $69.9 million, and financing cash inflow was $52.4 million; ending cash increased by $50.0 million.
- At quarter-end, long-term debt was $43.8 million, repurchase agreements were $16.3 million, and short-term borrowings were zero. Total borrowings as presented in MD&A were $60.1 million. Shareholders’ equity was $509.5 million, including $152.7 million net proceeds from a private placement of 4.81 million shares.
- FirstBank reported total capital to risk-weighted assets of 12.26%, CET1 of 11.40%, and Tier 1 leverage of 9.67%; it was reported as well capitalized. Company total capital to risk-weighted assets was 19.14%.
- Credit quality indicators included nonperforming loans of $9.9 million (0.50% of loans), nonperforming assets of $19.5 million (0.58% of assets), and an allowance for loan losses of $23.2 million, or 1.18% of loans. The allowance covered nonperforming loans by 233.73%. The company recorded a $0.9 million provision reversal in Q2 and a $1.1 million reversal for the first half.
Material developments, outlook and risks
- Clayton Banks acquisition: FirstBank completed its acquisition of Clayton Bank and Trust and American City Bank on July 31, 2017, after the reporting date. The stated transaction value was approximately $236.5 million, funded with approximately $184.2 million cash and 1,521,200 FB Financial shares. At June 30, the banks had approximately $1.2 billion in assets, $1.1 billion in loans, $900 million in deposits and 18 locations. Purchase accounting was not complete. The company planned core-system conversion in Q4 2017.
- The company expected approximately $10 million of merger and conversion costs through 2017, alongside $10 million in community investments in the acquired markets, and approximately $4 million of project-related expenses over the following 12–18 months. These are management expectations, not earnings guidance.
- After quarter-end, the company borrowed $100 million from the FHLB to help fund the acquisition and entered into interest-rate swaps to convert the advances to fixed rates. It also began hedging approximately 50% of its mortgage servicing rights portfolio.
- Effective January 1, 2017, the company elected fair-value accounting for mortgage servicing rights (MSRs). This produced a $0.6 million after-tax opening retained-earnings adjustment. Q2 MSR fair-value changes reduced mortgage banking income by $1.8 million; the first-half reduction was $2.3 million. The election changes the timing and presentation of MSR valuation effects.
- Management described the loan environment as supported by demand in its markets and generally favorable economic conditions. It cited rising mortgage rates as a factor that can reduce mortgage activity and sales margins. The company reported an asset-sensitive interest-rate position: a modeled 100-basis-point rate increase projected higher net interest income, while a 100-basis-point decrease projected lower income. These simulations rely on assumptions and are not forecasts.
- Key risks include credit losses and collateral valuations, commercial real estate and construction exposure, deposit-cost increases, interest-rate and mortgage-market changes, MSR valuation assumptions, acquisition integration and execution, and off-balance-sheet commitments. Loan commitments and letters of credit totaled $685.4 million.
- Disclosure controls were deemed ineffective at June 30 because of a previously identified material weakness involving timely recording of mortgage banking transactions and reconciliations of mortgage loans held for sale and related clearing accounts. Management said corrective processes had been implemented, but the weakness would not be considered remediated until controls operated effectively for a sufficient period.
- The filing reported no material changes to the company’s previously disclosed risk factors and no material pending legal proceedings. It provided no formal earnings or revenue guidance.
Important facts for investors to verify
- Review the post-quarter Clayton Banks acquisition results, purchase accounting, integration progress, and actual merger, conversion and community-investment spending.
- Track loan and deposit growth, funding costs, net interest margin, capital ratios, and liquidity following the acquisition and the $100 million FHLB borrowing.
- Assess whether mortgage volumes and margins, MSR fair values and hedging outcomes support mortgage-segment profitability.
- Compare earnings and EPS on a consistent C-corporation and share-count basis; reported 2016 comparisons are affected by the prior S-corporation tax treatment and fewer shares.
- Monitor loan delinquencies, nonperforming assets, recoveries, allowance adequacy and concentrations in commercial real estate and construction lending.
- Check whether management remediates the mortgage-accounting control weakness and sustains effective disclosure controls.